Standing Committee A

[Mr. John McWilliam in the Chair]

Finance Bill

(except clauses 4, 5, 20, 28, 57 to 77, 86, 111 and 282 to 289, and schedules 1, 3, 11, 12, 21 and 37 to 39) - Clause 112 - Private residence relief

Question proposed, That the clause stand part of the Bill.

Howard Flight: I welcome you to the Chair, Mr. McWilliam.
 There have been significant professional criticisms of the clause and the measures in the schedule. The Chartered Institute of Taxation has argued that the changes—

John McWilliam: Order. I would not want the hon. Gentleman inadvertently to mislead the Committee. The clause states:
''Schedule 22 (which makes provision about private residence relief) has effect.''
 I cannot see any possible professional criticism of that; it is a fact.

Howard Flight: You are, as ever, correct, Mr. McWilliam. Perhaps it would be better to cover the issues under the schedule, but as there are amendments to be discussed under the schedule, I thought there was an argument for dealing with criticisms in principle of the arrangements under the clause.

John McWilliam: It might help the Committee if I draw its attention to the selection list. The Committee will observe that I have selected schedule stand part together with new clause 11. That combination renders debate under clause 112 about the principle otiose.

Howard Flight: I stand corrected, and sit.
 Question put and agreed to. 
 Clause 112 ordered to stand part of the Bill.

Schedule 22 - Chargeable gains: private residence relief

Howard Flight: I beg to move amendment No. 30, in
schedule 22, page 388, line 28, leave out from beginning to end of line 20 on page 389 and insert— 
 '( ) Where a claim for relief under section 260 has been made in relation to a disposal of a property, the trustees' relief under section 223 above on a disposal of that property shall be limited to that proportion of the chargeable gain which reflects the period during which the property has been occupied as an only or main residence under the terms of the trust as a fraction of the combined period of ownership of the trustees and the person who claimed the relief under section 260. 
 ( ) In calculating the proportion mentioned in subsection (1) above, the Trustees shall only be entitled to relief for periods in which the property was in actual occupation by one or more beneficiaries and not for any period of deemed occupation.'.

John McWilliam: With this it will be convenient to discuss amendment No. 1, in
schedule 22, page 390, line 35, leave out sub-paragraph (8) and insert— 
 '( ) In subsection (5) of section 223 of the Taxation of Chargeable Gains Act 1992 after ''and (2)(a) above'' insert ''and section 226A below''.'.

Howard Flight: The mischief that the schedule is designed to deal with is the technique of transferring a second home into a discretionary trust as a conduit to passing it on to, for example, one's children, and later realising the property free of capital gains tax. Where the value of the home was more than a quarter of a million there would of course be inheritance tax to pay. The schedule removes the availability of principal private residence relief from capital gains tax where there has been an earlier deferral of gain under section 260 of the Taxation of Chargeable Gains Act 1992. The rest of the schedule is concerned with consequential amendments and some rewrite language. The formal inclusion of a former concession giving private residence relief to the personal representative of the deceased in certain circumstances is a positive move.
 I will return to the principles during the stand part debate. The problem is that if a person has, say, half a million in cash—lucky person—and settles it into a discretionary trust, the trustees could purchase a property and then claim PPR relief on a subsequent sale of the house, assuming it had been occupied by a beneficiary, but if the settlor provides not cash but an asset that becomes a beneficiary's PPR, there is no relief available. That may be the Government's intended policy position, but it seems unfair and disproportionate. Our point is that to avoid a double charge, there should be a credit against the capital gains tax of any inheritance tax paid in respect of the same gift. I recollect that in our debate on schedule 21, the Paymaster General said that the Government were not looking to bring in double taxation. I therefore ask her how she is addressing the issue in relation to clause 112 and schedule 22. 
 A possible alternative might be to address the perceived mischief directly. The objection is to short-term washing-out strategies, so might it not be possible to limit the PPR relief available to the trustees to that proportion of the gain that reflects the period for which the property was occupied as a PPR under the trust during the total ownership period of the trustees and the donor? That would address those situations where trusts are used as a short-term device to wash out, without unfairly treating innocent situations or catching changing circumstances. 
 It is not uncommon for young adult children to be provided with a home from a discretionary trust set up five or 10 years before. They are then given the use of the property, as one would not want to give large sums of money directly to young people for reasons of prudence. One might want to have the property used by a succession of beneficiaries. In both situations, there can be bona fides cases in practice, and tax is not a primary motivation for such arrangements. 
 Assuming the measures stand, there are some points of detail to address, with which amendments Nos. 30 
 and 1 are concerned. I am sure that the Paymaster General will argue that she simply wants to block a piece of tax avoidance, fairly or not. Our argument of principle is that the anti-avoidance measures are disproportionate and put trustees who receive cash and buy a house in a different position from trustees who receive a property. There are significant long-term record-keeping requirements and tracking of claims, and no response is allowed to changing circumstances. 
 Amendment No. 30 is a rewrite of paragraph 6, designed to persuade the Government that the mischief can be addressed in a fairer way. It proposes that trustees are no longer entitled to the last 36 months in any event, but only if the property is in actual occupation. Amendment No. 1 is a little less easy to get one's mind round, but where the existing legislation refers to 36 months the amendment would allow the Treasury to change that period to 24 months for all purposes. Would it not be easier to do that through a much simpler wording, as in the amendment? I would like the Paymaster General to justify the length of paragraph 8(8). I shall make slightly more fundamental criticisms in the stand part debate.

Dawn Primarolo: I remind the Committee that clause 112 and schedule 22 are targeted at measures that are designed principally to avoid capital gains tax. That exploitation depends on there being no immediate capital gains tax charge. Subsequently, the effect of the interaction of gifts relief with private residence relief has been that capital gains tax is avoided entirely. The purpose of the measures is to ensure that the changes are appropriate in tackling that avoidance.
 There are a number of reasons why I shall be asking the Committee to reject amendment No. 30, which would limit the restriction of private residence relief proposed in the schedule. The purpose of the schedule is to stop capital gains tax avoidance schemes that exploit the interaction between gifts relief and private residence relief. Such schemes aim to convert chargeable gains on disposal of residential property that would not normally qualify for private residence relief into tax-free gains by the use of the trusts. Clause 112 and schedule 22 deny private residence relief to people who dispose of a property, where the computation of the chargeable gain resulting from that disposal is affected by a claim to gifts relief relating to an earlier disposal. 
 In a simple case where a second home is sold and the owner wishes to avoid capital gains tax, he or she gifts the property to the trustees of a trust and claims gifts relief, so that no capital gains tax is payable at that point—it is deferred. Arrangements are then made for a beneficiary to live in the property for enough time—it can be a short period, possibly days or months—to establish an entitlement to private residence relief. 
 The trustees then sell the property and obtain the relief. The result is that the gain is wholly relieved by private residence relief and no tax is payable, not even in respect of the earlier hold-over gain that accrued 
 while the property was not the only or main residence of the person who owned it at the time. By denying private residence relief in circumstances where gifts relief is obtained, clause 112 and schedule 22 provide for the whole of the gain arising on the disposal of a second home to be taxed, irrespective of the interposition of a trust—a trust put there simply to avoid the tax on that gain. 
 As I understand it, amendment No. 30 would allow trustees private residence relief when they dispose of a property that has been the subject of a gifts relief claim, but would limit the amount of relief available by reference to the amount of time that the property was occupied as an only or main residence under the terms of the trust. That would render the legislation ineffectual in combating such avoidance, because it could easily be sidestepped. Committee members must ask themselves why those schemes are being used. They are being used to avoid paying the tax on the capital gain. The amendment would address only the most straightforward cases, where there is a single gifts relief claim and the trustees dispose of exactly what was gifted to them. That does not happen. There are many complex forms in that area. 
 The amendment would not, for example, deal with cases where successive gifts are made through a number of trusts, as frequently happens. Nor would it deal with cases where interests in a property are divided or combined and where there are a number of relevant gifts reliefs claims that have been made by different persons. Nor would it deal with cases where the final sale is made by an individual and not by those trustees of a trust who had gifted the property to that individual. It would leave open opportunities for people who dispose of second homes to be able to continue to avoid capital gains tax by exploiting the interaction of gifts relief and private residence relief. 
 On the other hand, clause 112 and schedule 22 deal with all such cases. I think that it would be naive to assume that those elements of the tax-planning industry that enthusiastically marketed those schemes would not be up to devising and selling variations, which could drive straight through the legislation if it were to be amended by amendment No. 30. It is not acceptable because it leaves open those possibilities. 
 Another reason why I will ask the Committee to reject the amendment is that even if it were effective it would impose a greater compliance burden on the taxpayers. The ultimate vendor of the property would need to know not only his acquisition costs following his gifts claim but the period or periods of ownership of the previous owner or owners. In anything but the simplest of cases, the burden might be considerable. 
 For those two reasons, I say to the hon. Gentleman that schedule 22 as drafted provides a more effective and equitable way of stopping this drain on the public purse than would the measures as amended by amendment No. 30. 
 I ask the Committee to reject amendment No. 1 as well. As drafted, it was very difficult to understand its objective, but in moving it the hon. Gentleman has clarified that. I have explained that the anti-avoidance 
 measure in the schedule is being introduced to prevent people from exploiting the interaction of gifts relief and private residence relief to make a tax-free disposal of a property that would not otherwise have attracted private residence relief. 
 We recognise that because the measure has effect from 10 December 2003 some people will have entered into arrangements before that date expecting a certain amount of relief. That is why we have included a transitional period preserving any entitlement to private residence relief, which is referable to the period before 10 December 2003. The transitional provisions also preserve entitlement to private residence relief if any proportion of the last 36 months of the ownership falls before 10 December 2003 and the relevant conditions are met. Frankly, that is as fair as we can be. 
 I am grateful to the hon. Member for Arundel and South Downs (Mr. Flight) for explaining that, by providing a neater way of catering for the effect of the consequential changes that would need to be made if the last-36-month rule were to be changed by Treasury order, amendment No. 1 is intended to be helpful. Although I thank him and I appreciate his sentiments, the amendment does not appear to achieve its objective, because it would have effect over the whole measure rather than just the relevant transitional rule. I am sure that that is not what he intended. 
 In any event, even if the amendment were to work, which it would not, its effect would be the same as that of the legislation as drafted. I appreciate the hon. Gentleman's motives, but the amendment does not deliver. 
 The hon. Gentleman made three specific points. The first was about cash being provided to a trust. If a person provides cash to a trust, they are not seeking to avoid capital gains tax by using gifts relief and private residence relief. The circumstances are different and therefore there is no unfairness.

Howard Flight: I understand the Minister's point, and we are agreed on the mischief that needs to be blocked, but the other side of that coin, as I set out, is that there are perfectly bona fides situations where a property is provided, to which these measures would unfairly apply.

Dawn Primarolo: I was coming to that. This schedule has not changed the way in which capital gains tax and inheritance tax laws interact. There may be a charge to both inheritance tax and capital gains tax if within a seven-year period the person who has made the transfer of values that are immediately chargeable to IHT exceeds the IHT-exempt amount. CGT is due where the gain is chargeable within the rules. The effect of gifts relief is to transfer the CGT liability in respect of a chargeable gain from the transferor to the transferee, whose adjusted acquisition cost for CGT purposes reflects the fact that no CGT or a reduced amount thereof is paid in respect of the transfer. Any inheritance tax paid on the transfer is therefore allowed as a deduction in computing the transferee's gain, and none of these provisions has changed. The measure prevents people from exploiting
 the interaction of the gifts relief and the private residence relief rules to realise a gain on residential property tax-free.
 The hon. Gentleman also made the point that, for instance, people with a family home that came from a discretionary trust some years ago will either have to move to avoid the CGT on the sale of their home or face a tax bill like no-one else in the country. I am trying to make the point that the current rules are not disturbed. We are dealing specifically with the interaction of the gifts relief and the residential relief, at which point no tax is paid to the Exchequer. We are now seeing a considerable number of schemes exploiting this arrangement, and it is necessary that the Government move to defend that revenue. 
 I am sure the hon. Gentleman would agree that the tax rules are quite clear, and where a person puts in arrangements to avoid the tax charge that is clearly to be levied against the property, it is not unreasonable for the Government to move to ensure that the rules operate as they should, and to prevent that exploitation from occurring. That is precisely what we are doing in schedule 22. I hope, therefore, that he will not press his amendments to the vote, but if he does, I will ask my hon. Friends to oppose them.

Howard Flight: As I said a moment ago, we share a perception of what the perceived mischief is, and I felt I described it rather more simply and clearly. We are not opposed to measures to block up such mischief. Our concerns are that the measures being taken could fall unfairly on bona fides situations, although I was pleased to hear the Paymaster General's confirmation on the interaction between IHT and CGT.
 I shall first ask the Paymaster General for a clarification that she will be aware has been generally sought. In paragraph 6 of schedule 22, new section 226A of the Taxation of Chargeable Gains Act 1992 allows private residence relief to continue if the hold-over claim under section 260 of that Act is revoked. In the previous paragraph, section 260 does not contain a specific right to revoke the election. Is there any time limit during which such a revocation can be made, or does the normal five years and 10 months apply? Does a revocation need to be entered into by both parties in the same way as a claim? 
 The Chartered Institute of Taxation has also argued that the route being employed by the Government to address the mischief is inappropriate and that it would have been better and simpler to have legislated so that main residence relief is not available on the hold-over gain. The institute is also concerned that there is an element of retrospection in the arrangements and believes that it should contain a more suitable set of commencement and transitional provisions and that taxpayers should, at least, be able to undo the effect of the earlier election and pay whatever tax would have been due if it had not been made. The institute also suggested that there should be a backstop date—for example, April 1997—with the new provisions applying only after that date. 
 The Paymaster General has, in general, not convinced me that bona fides situations will not be 
 unfairly disadvantaged. I broadly accept that amendment No. 1 may not work, but it is an attempt to simplify the drafting. She argues that amendment No. 30 would leave the door open to continuing exploitation, and I will take her word that neither amendment satisfactorily addresses the fundamental issues that we and others are concerned about. However, I would like to hear a clearer defence, if it exists, to show that bona fides situations are not disadvantaged by the proposed measures.

Dawn Primarolo: The hon. Gentleman asked about time limits for revocation, whether both parties need to be involved, and how the gift hold-over claim can be revoked. If a claim was made within a tax return and the window for amending that return has closed, the person who made the gift cannot undo the position and is stuck with the consequences of the decision to make that arrangement in the first place to seek to avoid the tax. Likewise, if a claim was outside a return and the window for amending it has passed because it is more than 12 months from the date that the claim was made, the person cannot undo the position and is again stuck with the consequences of that decision.
 We are back to a point that we have discussed before about those who undertake such tax planning in the full knowledge that it is designed to avoid paying tax even when legislation clearly says that tax is liable on the gain. They enter into those arrangements by choice, so they cannot say, ''I made that choice and I might have got away with it, but I am not going to now, so I want to revisit my choice with hindsight and make different arrangements.'' If we cater for that, we would be saying to those who seek, through tax planning, to avoid tax for which they are clearly liable, ''If you don't manage it on the first go, don't worry, we'll let you take another run at it by undoing the arrangements that you originally put in place and seeing if there's something else you can do to avoid it, or you can play by the rules.'' 
 The hon. Gentleman has made this point in various ways during debates on the Bill, and I have responded in various ways. If people seek to avoid payment of tax that tax legislation says is clearly liable, they must take responsibility for their choices. 
 On revocation, it is clear that the tax legislation does not intend that people should seek gifts relief and then trigger residence relief as if the property was their prime property, the one that they occupy. I know that the hon. Gentleman understands that. It is right that we should make such changes, and frankly it is high time that people understood that consequences flow from their choices and that the tax system is not static but can change. I am reminded of the point that my hon. Friend the Member for Wolverhampton, South-West (Rob Marris) made on clause 162 of the 2003 Finance Bill about those who had entered into 25-year mortgages with mortgage relief. Mortgage relief was progressively reduced over time by the Conservative Government and this Government. No one argued that people should carry on receiving it or that they 
 should be able to revisit financial arrangements that they had made earlier. We all make choices. 
 I am very firm on this point and will continue to echo it through the stages of the Bill. The clear message to those who want to tax plan is that you can tax plan, but if we change the system, you are stuck with your choices. That is perfectly reasonable; that is life. 
 The hon. Member for Arundel and South Downs asked whether both parties would be subject to a revocation. That would be the case only if both parties were required to make the claim—it would not automatically have to be both parties. However, that will not be the case for gifts to trust. Trustees of settlements make gifts relief claims only if they are the party making the disposal. 
 The hon. Gentleman's final point was about claims being revoked. We have made no changes to the claims rules. Gifts relief is given if the transferor makes a claim, and the normal rules relating to withdrawal of that claim apply. That is still the case. Thus, a claim cannot be withdrawn or amended after it has become final, except in certain exceptional circumstances, which are provided for. Otherwise, it may be withdrawn at any time, and people can vary their claims as long as they are not final. Again, he well knows that that principle operates throughout the tax system for final claims, and that it is entirely reasonable. 
 The hon. Gentleman's arguments have not convinced me. The purpose of certain arrangements is to avoid tax. The purpose of schedule 22 is to block such opportunities. People take advice when they enter the schemes. They know full well what they are doing and that there will be consequences if any Government of the day move to ensure that the tax system operates properly. I believe that the hon. Gentleman, were he ever in the position of a Treasury Minister faced with such prospects, would make exactly the same decisions as I have, because it is the fair way to proceed.

John McWilliam: Before I call the hon. Gentleman. I hope that the Committee does not think that I am feeling very lax this morning, but the Paymaster General's use of ''you'' in that context is entirely consistent with the fact that, unfortunately, Chairmen of Finance Bills are also covered by the legislation with which we are dealing.

Howard Flight: The Paymaster General thinks she is being very clever by finding a route to make measures retrospective that are technically only retroactive. I have a long letter from leading counsel and as a result I have written to the Joint Committee on Human Rights about clause 84 and schedule 15. It has been a long-established practice of this House not to enact retrospective legislation. There is a very subtle difference that the Paymaster General ignores between dealing with changing the rules on tax going forward and finding a method of retrospectively impacting on an individual.
 If all the Paymaster General's moral preaching is correct, I very much hope that the Government will pass legislation as a result of which the £1 million saved by the Labour party on a clever bit of VAT 
 avoidance, to which I have referred twice, will be made retrospective. Oh no, we have not had that; we have not had a dickie bird about that. Of course, all bodies, including the Labour party and lots of its Members of Parliament perform the tax planning that is available to them within the law; it is only human nature. I strongly object to the tone of the Paymaster General's comments. 
 The Government's measures are contrary to British traditions, and we will see what the Joint Committee has to say about the presentation of what is retrospective as retroactive. It is a clever way round the established rules on the difference between retrospection and retroaction. 
 Government and Opposition Members agree on what the mischief is, we support prevention and accept that there has been an exploitation of the interaction of IHT and CGT. The disagreements are twofold: first, we disagree on the retrospective nature; and secondly, as I said earlier, we are concerned that bona fides situations will end up liable to tax charges. 
 Neither of our amendments is worth putting to the vote, but we cannot support the schedule for the reasons that I have outlined.

Rob Marris: I put it to the hon. Gentleman that his analogies are misplaced, particularly in terms of Labour party purchasing, VAT and so on. Certain people have ordered their tax affairs in a certain way. It is like betting on a greyhound race: they put their money on Running Whip in a six-dog race, halfway through the race the dog gets disqualified, and with the hon. Gentleman's approach, they want to go back and place a bet on one of the other five dogs.
 The hon. Gentleman made his cheap political shots about VAT and the Labour party headquarters, but the distinction is that the greyhound race is over. It is a done deal—it is not somebody trying to change things halfway through. The tax affairs are finished. It is in contradistinction to the situation that he seems to want, in which people order their tax affairs in a certain way hoping that the tax regime will remain unchanged and that—to use my analogy—their dog will come home and win. That is not the case, because the dog was disqualified. People cannot return to the beginning, status quo ante, and put a bet on another dog. 
 Similarly, when the Government lowered the rate of income tax—both the basic rate and the standard rate—that was a change in the tax regime. People in that situation under those Finance Acts had already earned money in that tax year, and I suspect that the hon. Gentleman did not stand up and say, ''That's a change in the tax regime; those individuals earned money when they thought they were going to pay 23 per cent. standard rate tax, now they are going to pay only 22 per cent. That is retrospective and a breach of their human rights. They should still be paying tax at 23 per cent.'' I did not hear him saying that.

Howard Flight: Without repeating what I have just said, the hon. Gentleman's analogy is not fair.

Mark Prisk: Not a runner.

Howard Flight: Perhaps so. To be as clear as possible, there is a subtle difference between when things have been viewed as retrospective from a legal perspective and when they are retroactive. Self-evidently there are all sorts of situations where Governments of all persuasions will change income tax rules and that is obviously an essential flexibility.
 There are precedents for legal changes to block tax avoidance schemes going forward rather than taking measures that effectively cast back to when whatever was done was perfectly legal. The Government have deliberately—indeed, the Paymaster General has made a virtue of it and boasted about it—found routes, of which clause 84 and schedule 15 are the greatest example, but this is another, to introduce measures that technically look retroactive, not retrospective, but within the established body of legal thinking are deliberately retrospective in their impact by past or established standards. It is not a question of a dog not coming in; the law was as it was for better or worse and the measures change what the law would have been in the past. I concede that this is a grey and difficult area, even within the territory of what is retrospective and what is retroactive. 
 This is a dangerous path to walk. An eminent past Labour Member of Parliament phoned me this week to complain, and cited a well-known parliamentary proceeding when the previous Conservative Government were attacked by Labour Members for measures that they viewed as retrospective in their impact. There was a great parliamentary debate and changes were made. The Paymaster General is being dangerously glib and self-righteous. It is a territory that needs constitutional analysis, which is why I have referred to the Joint Committee on Human Rights to see what it has to say. 
 It is right to block up perceived abuses and mischiefs. The Inland Revenue should be on the ball and block them up as soon as possible, but broadly the established practice is to block them up going forward, and especially where the measures can result in bona fides situations being unfairly caught. That is not a fair way of proceeding. The basis of this country's tradition of taxation is about consent. It is bogus for Governments of either party to stand up and say that it is the will of Parliament, so be damned. Ultimately, taxation relies on the consent of those paying it.

Dawn Primarolo: This is an important point about retrospection. The measure applies only to gains arising on or after 10 December 2003. Capital gains tax is an event-based tax. It is normal for capital gains tax changes, whether relieving or charging, to apply to disposals on or after the date when the change in question is announced. Any such changes will naturally affect existing arrangements because those are the ones being used for the avoidance and that would otherwise continue to be used. As the hon. Gentleman rightly identified, Governments of all persuasion seek to block avoidance when they see it.
 The proposals also have transitional provisions that preserve any entitlement to private residence relief up to the date when the change came into effect. The use of that date featured in the procedure adopted by the previous Governments, and we are using it now. The conditions for entitlement and relief should take effect from 10 December 2003: the date when the change was announced. The relevant legislation and the explanatory notes were published at the same time as the announcement. Given that the hon. Gentleman has accepted that there is a mischief in this case, to allow avoidance to continue would mean an unnecessary loss to the Exchequer. Publishing the legislation and the explanatory notes makes it absolutely clear how the Government intend the legislation to operate from that date onwards. 
 That is not just a tried and tested route of this Government—I am not making a virtue of it, despite what the hon. Gentleman says—it is how the previous Conservative Government dealt with anti-avoidance measures, and it is perfectly proper to enact the provisions from the point when they are announced. I have said that we are not going back to undo, or returning to claims that are closed. We are simply saying that from 10 December 2003, the rules will operate and everybody has been told about that. 
 On that basis, I continue to argue that the measure is not retrospective, unless the hon. Gentleman is going to stand up and say that the previous Conservative Government got it all wrong when they introduced such legislation. He may disagree with the measure, but the Government rebut the accusation that it is retrospective. I am sure that it will continue to need proper scrutiny as we proceed, because it is important an important principle in taxation matters.

Howard Flight: I will not prolong the point more than I have to. We have no objection to the principle that the next Budget and Finance Bill will change the law effective from a specified date, such as last December, and as the Paymaster General rightly comments, previous Conservative Governments did that. That is not the basis of our objection. She said that the net effect was not to go back and undo. I shall oversimplify, because it is complex territory, but the point is that when past Governments took anti-avoidance measures the net effect was on a going forward basis. The scheme or arrangement was dead from the future. It was not always grandfathered in terms of what the situation had been before, but that was the general principle. As the Paymaster General has commented, in a number of ways this Government have introduced punitive measures, as if to say, ''You naughty people, you undertook this avoidance planning in the past. We are introducing proposals that make sure that you get hit because of measures that were perfectly legal at the time you took them.'' That is why we have concerns. The area is sufficiently grey that there are some aspects that, in an historical sense, have precedent, but some that do not.
 I will send the Paymaster General a copy of the letter, because I was impressed by the arguments that 
 counsel made about why introducing a new basis of taxing things is, in substance, retrospective, even though in law it may be retroactive. 
 I beg to ask leave to withdraw the amendment. 
 Amendment, by leave, withdrawn. 
 Question proposed, That this schedule be the Twenty-second schedule to the Bill.

John McWilliam: With this it will be convenient to consider new clause 11—Capital gains tax: foster carers and adult placement carers—
'In the Taxation of Chargeable Gains Act 1992, section 224, after subsection (1) insert— 
 ''(1A) Subsection (1) above shall not apply to any part of a dwellinghouse that is used exclusively for the purposes of a trade or business which consists of the provision of: 
 (a) foster care within the meaning given by paragraph 4 of Schedule 36 to the Finance Act 2003; 
 (b) accommodation and care to people placed through an adult placement scheme operated by a local authority, an HSS trust or an independent body.'.

Howard Flight: We have had a sort of stand part debate. New clause 11 is related, but in a different territory. It—

John McWilliam: Order. The hon. Gentleman is right, and under normal circumstances, I would have deemed that the stand part debate had taken place. However, new clause 11 is very specific and the points that it raises have not been covered.

Howard Flight: New clause 11 touches on the issue of where private personal capital gains tax relief should apply, part of which schedule 22 is about. Both the Low Incomes Tax Reform Group and various charitable groups have raised that issue. As we understand it, fosterers of a child or of an adult needing care—individuals who look after such people in their homes—are deemed to be operating a business and are therefore denied capital gains tax private residence relief. That seems to us to be wrong and to be a major deterrent to fostering.
 The new clause would remove a capital gains tax liability on a principal private residence in such situations. I hope that the Paymaster General will tell me that that is not, for one reason or another, the case anyway, but as I understand it, it is the case. It seems to me to be morally wrong that people are penalised if they are doing good in the community by fostering children or adults.

Rob Marris: I have considerable sympathy with the new clause, as I understand it. I urge my right hon. Friend the Paymaster General to consider the issue sympathetically, even if the wording is not quite right.

Dawn Primarolo: I understand that the Low Incomes Tax Reform Group made representations on new clause 11, but it is incredibly difficult to find circumstances in which a charge would arise. I will explain to the Committee how the system operates and why new clause 11 is not necessary. The hon. Member for Arundel and South Downs and my hon. Friend the Member for Wolverhampton, South-West are, I think, echoing a point that all Committee members would want to make, which is that fostering children and
 providing adult care are very important. We would all want to support people engaged in such activities.
 The problem comes in the following respect, regardless of whether it is a theoretical point: if those activities amount to a trade or business, the person carrying on that trade or business sets aside part of their only or main residence exclusively for business purposes. If that occurs, the rules for private residence relief should be available in respect of the part of the gain that is their private residence. However, with fostering and adult care, the carer is taking the individual into their own home, and it is difficult to see where liability would arise—although I do not intend to speculate on circumstances, because that is always dangerous. 
 The hon. Gentleman will understand that I am a little nervous of a blanket clause that says that a residence set aside specifically and only for the purpose of trade or business should still qualify for residence relief. I do not see the problem in the first place—it is not occurring—and I am concerned about putting in a rule that just might provide greater opportunities for other things, let me put it no stronger. 
 As I have said, foster carers are using their own home and taking in children as if they were part of the family. That often happens with the provision of respite care for adults. In those circumstances, where there is either fostering or a placement of an adult in respite care, it is not the case that all such carers face a capital gains tax charge on the sale of their home, as if they had used it partly for the purpose of providing care and accommodation for the people placed under the scheme. I cannot see a reason for a new provision, and I am nervous of introducing one. It would be inappropriate for private residence relief to be available on the gain for part of a property that has been referred to as a business part of that property. 
 I am not aware that representations have been made to us that there is an issue here with regard to real cases. Of course, I am not aware of every single case that comes to the Inland Revenue. I am saying to the hon. Gentleman that where the care is being provided in people's own home, and they are therefore not carrying out a business or trade, the residence relief is available. I am struggling to see under which circumstances such care would come under the business or trade categorisation, because then the residence would have to be wholly put aside exclusively and only for that purpose, and it would not be foster care and respite care, which are driven by going into somebody else's home—if I am making myself clear. 
 The hon. Gentleman, who has made his point and spoken to the new clause, has certainly caused this subject to be scrutinised in preparation for the Committee.

Mark Prisk: I did not intend to intervene at this point, but I am reminded of a constituency case—it is one I suspect hon. Members will be familiar with—in which an extension was made to a home for the purpose of fostering a significantly disabled child. When that home went on sale, that extension was regarded as an improvement, and therefore there was a
 question about tax. Will the Paymaster General clarify that situation?

Dawn Primarolo: It is difficult for me to comment on particular cases without having the full details, but the example that the hon. Gentleman has given is similar to the theoretical example that I asked my officials about. A family is foster caring for a child with disabilities and adaptations are necessary, but the home is still a residence and is not exclusively put aside for the purpose of foster care. Would that come under the business or trading rules? The issue would be whether, under the rules, the people concerned were carrying out a trade.
 It is difficult. We are venturing into how other tax rules impinge on this area. In those circumstances, I am advised that, where the residence still operates as the family home and the child or adult is taken into that home, residence relief would be available. 
 It is always dangerous to go down the route of saying, ''What if this happened? What if that happened?'' in a Finance Bill Committee. If the hon. Members for Hertford and Stortford (Mr. Prisk) and for Arundel and South Downs have specific examples of the rules not operating as expected, I will be happy for my officials to look into those individual cases. However, I am not keen to put a general blanket provision into the Bill when I do not think that it is necessary in the first place and am a little nervous that it might be used in ways that none of us intended.

Rob Marris: Accountants used to advise—I think they still do—that a dentist, for example, who had a surgery in her own home should hold a party there at least once a year and invite the tax inspector. That would get round the word ''exclusively'' because it would mean that it could be shown that that room within the residence was not used exclusively for dental purposes. I am told by the Chartered Institute of Taxation that the problem with foster care is that it is difficult for people to say that, once a year, they share the bedroom where the foster child stays. I am grateful to the Paymaster General for saying that she will look into the matter. That is sufficient for me.

Howard Flight: I can understand why the Paymaster General does not want to change the law if that is not necessary. However, it strikes me that, to the extent that the issue could arise—she will be aware that not just the Chartered Institute of Taxation, but one of the key charities has raised the matter—it is unsatisfactory for the position to be at least potentially grey in an area such as this. Is not an alternative solution for the Revenue to make it clear in guidance that it does not regard fostering a child, or being an adult carer in one's house, as in any way constituting a trade for tax purposes? If that were made clear, it could resolve the problem.

Dawn Primarolo: The hon. Gentleman is quite correct about the ways in which the matter could be resolved if there is a problem. However, unless he writes to me with examples, I am unable to ascertain whether somebody has looked at the Bill and said, ''We can see a theoretical possibility'', although no one has actually been caught in that situation, or whether
 the matter is, as he said, a little grey for some people and therefore could be clarified in Inland Revenue guidance. As a rule, because Finance Bills are already rather large, I do not include provisions to deal with theoretical possibilities that may not arise—or I try not to.
 I hope that the hon. Gentleman, recognising that guidance may be another way to deal with the matter, will send me the details, so that my officials can consider them. I would be happy to reply to him and all members of the Committee if such details should—that is a big should—make clarification and guidance necessary, in which case that simple step could be taken. On that basis, I hope that he will accept that this important subject has been adequately aired, will not press new clause 11 to a vote, but will agree to leave me to find out whether the incidents are theoretical or happening and, if they are happening, what I can do about them.

John McWilliam: Order. If the hon. Gentleman presses new clause 11 to a vote, it will be not today but at the end of the Bill.

Howard Flight: I will be happy not to press new clause 11 to a vote later in our proceedings. I shall write to the Paymaster General, as she suggested. I simply end by saying that the issue is greyness, not whether such incidents are tax challenges. I cannot see any objection in principle to Revenue guidance that makes it clear that fostering and adult caring are not viewed as businesses for tax purposes. I do not believe that anyone ever thought that they should be, and I cannot imagine that any member of this Committee thinks that.

Dawn Primarolo: The hon. Gentleman may be aware that the Government consulted on taxation and foster carers and that there were changes in the Finance Bill last year. To my recollection, his point was not made last year—it is completely new, and that is why I am struggling with it. It was not made when we specifically asked all the associations about these issues. That is why I wish to ensure that this is a grey area before we rewrite the guidance.
 Question put and agreed to. 
 Schedule 22 agreed to.

Clause 113 - Authorised unit trusts: treatment of

Question proposed, That the clause stand part of the Bill.

Howard Flight: The clause arises because the current definition of an authorised unit trust may not work as intended in respect of umbrella schemes. It is a welcome technical improvement. I should also declare an interest, as the individual who invented the umbrella scheme structure 20 years ago. I am pleased to support the clause.
 Question put and agreed to. 
 Clause 113 ordered to stand part of the Bill.

Clause 114 - Individuals benefited by film relief

Question proposed, That the clause stand part of the Bill.

Mark Prisk: I take this opportunity to welcome you to the Chair for our deliberations, Mr. McWilliam. Clause 114 begins chapter 9 of the Bill. Together with clauses 115 to 118, it seeks to tackle tax avoidance schemes whereby individuals try to convert what is, in essence, a tax deferral into a permanent tax gain. That can occur when someone in the film trade, whether alone or in partnership, calculates their taxable profits or losses in line with the sector's two principal tax relief schemes, known as section 42 and section 48.
 The recent Culture, Media and Sport Committee report on the British film industry highlighted the fact that those two tax relief schemes have been vital to the UK film sector. After all, it is a business that in any average year is able to export films worth about £700 million. In the five years up to the end of 2003, the industry generated inward investment of about £1.7 billion. It is a very important industry. It is about not simply the quality of films, but the generation of crucial wealth and employment in this country by a British film sector with tremendous skills and talents that are the envy of the world. 
 The clause, supported by clauses 115 to 118, seeks to impose an income tax charge on an exiting partner. I would like to express the concerns of the industry and its advisers about whether it will achieve its stated purpose.

Rob Marris: Does the hon. Gentleman agree that the tax breaks introduced by the Government in previous years for the film industry—some of them have been abused by the television industry—have resulted in £2 billion of foregone tax revenue, which is a considerable amount?

Mark Prisk: The hon. Gentleman refers to section 48 of the Finance (No. 2) Act 1997, and he is right to say that there has been significant abuse. Government and Opposition Members support the need for accurate and targeted measures that help. That will form part of the debate as we progress.
 I do not deny that there has been persistent tax avoidance in the sector. Rather, I wish to ensure that the clause accurately affects abusive tax avoidance without unduly damaging commercial trade and legitimate business activity. Under clause 119, we will address the issue of film investment and film partnerships, where it seems that the balance is not being achieved. 
 I wish to raise a couple of concerns about how the changes for exiting partners and exiting individuals will work in practice. The clause seeks to impose a charge on the exiting partner at the point of exit. The Government seek no additional income tax charge in the event that the profits to which the exiting partner would have been entitled continue to be chargeable to UK income tax. Several representations, not least from the Chartered Institute of Taxation, have highlighted various situations in which an exit may be optimal to the individual but does not specifically 
 aim to remove future profits from a charge to UK income tax. 
 For example, there is the situation in which one partner dies. We understand that, in film and related industries, the revenue stream from royalties is important. They tend to last for a long period—10 or 15 years. Frequently, a partner involved in that sort of structure dies and, legally speaking, exits the partnership. Arrangements must then be made to handle future incomes from those royalties and the withdrawal of the capital investment. Those arrangements are bona fide and there is no wish or intention to abuse the tax system. Rather, someone is trying to settle an estate. In other circumstances, including those involving withholding tax, it is clear that the reasons for a partner exiting are entirely commercial and legitimate. 
 The concern with the clause is that there seems to be a genuine risk that the exiting partner could be liable for extra income tax even where their future profits face tax liabilities while in the hands of the remaining partners. Perhaps the Paymaster General can clarify the clause, but there is considerable concern that it could achieve for some people the opposite of its stated purpose. 
 Referring to the point made by the hon. Member for Wolverhampton, South-West, I have no doubt that unreasonable behaviour and abusive tax avoidance must be tackled. I hope that the Paymaster General recognises that the question is about not the intent of the legislation, but its efficacy. 
 A number of related issues concern the tax regime for the film industry and film partnerships, but the principal issues in that regard will arise later, particularly under clause 119, and I shall reserve my comments until then, if I catch your eye, Mr. McWilliam.

David Laws: Good morning, Mr. McWilliam. I have two questions on clause 114, which apply equally to clauses 115 to 118. The first question is straightforward and the second covers a wider issue that touches on the Government's intent.
 First, can the Paymaster General clarify the individual revenue yield from clause 114? I am not sure whether that information has already been published. I may have missed it, but when I tried to find it in the Red Book and elsewhere I was unable to do so, so I should be grateful if the Paymaster General indicated what the expected revenue yield is from clause 114 and, if the figures are available, from clauses 115 to 118. 
 The second issue touches on the Government's intention in clauses 114 and 118, which is to tackle some of the tax avoidance associated with the film industry tax relief over the past five or six years. The hon. Member for Hertford and Stortford raised some concerns about that and the film industry has lobbied on the Government's measures and their impact on jobs and revenue in the industry. 
 I want to make a slightly different point. We are always lobbied effectively by the groups that are 
 directly affected by the measures in the Finance Bill each year and perhaps we do not always think of the general taxpayer and their interests in our debates. My concern is not so much about whether the Government's action in trying to deal with tax avoidance is going too far, but about whether it does not go far enough and whether it would not be better to replace clauses 114 to 118 with measures to abolish the reliefs. The hon. Gentleman touched on some of the tax-avoidance problems relating to film industry tax relief during the past few years. It may be helpful to remind ourselves of what has happened in relation to film industry reliefs and the avoidance issues that we are discussing and debating today. 
 After the Government introduced the latest film industry reliefs in the July 1997 Budget soon after the Labour party came to power, the estimated cost of the film industry reliefs was modest: £5 million in 1998–99 and £15 million in 1999–2000. There was a further upward revision of the figures in the 2001 Budget when film industry reliefs were extended and the cost estimate was increased by £50 million for 2003–04. That was pretty small beer—tens of millions of pounds—for the cost of those reliefs. 
 The figures now for the cost of film industry tax relief since 2001 are not £10 million, £20 million, £25 million or £50 million, as we were led to believe, but £440 million in 2001–02, £300 million in 2002–03 and £300 million in 2003–04 to 2005–06. If the Government have got their figures right—it remains to be seen whether they have got them right for the whole Parliament, because that has not been the experience so far—they will spend £1 billion on that tax relief during the current Parliament if it runs its full term, however unlikely that may be. That compares with around £1.25 billion for the whole of the child trust fund during a similar period. In other words, the Government have provided a £1 billion subsidy for the film industry compared with £1.25 billion for all the trust fund accounts for children during one Parliament. 
 We are entitled to ask the Paymaster General what returns we have had from that £1 billion, what estimates the Treasury have made of the increase in the activity and profitability of the British film industry over that period, and how many new jobs have been provided as a consequence of the expenditure of £1 billion of tax relief. We also ask whether clause 114 and—if you will allow me to mention them, Mr. McWilliam—clauses 115 to 118 go far enough, or whether we should consider a more draconian change. Instead of making the tax system even more complicated by bringing in anti-avoidance measures to deal with earlier problems, should we get rid of that tax relief altogether? 
 I have no doubt that the Paymaster General will say that, although I am making some legitimate points about the explosion in the cost of the tax relief in 2001–02 and 2002–03, that explosion was a consequence of avoidance issues that have been dealt with, not least, as the hon. Member for Hertford and Stortford mentioned, the classification of many well known television programmes as films, which allowed an explosion of tax relief in 2001–02 and 2002–03. The 
 Paymaster General will no doubt say that she dealt with those problems and that that abuse is not open. 
 The question remains, however, whether there has been any economic analysis of the benefits of the tax relief that is provided at great cost to the taxpayer and how many jobs are created as a consequence of that relief. The Treasury has been unable, to date, to answer that question. The question that I ask the Paymaster General to answer is: what would be the effect of not introducing clauses 114 to 118 but abolishing the film industry tax reliefs altogether and, as a consequence, saving the money for the general taxpayer? What is the Government's estimate of the effect that such a change would have on the film industry? What would be the reduction in jobs? 
 We are here to represent the interests and concerns of the people on whom the Finance Bill has a direct impact. Perhaps, as a consequence, we do not always take into account the interests of taxpayers in the wider public. I think that most taxpayers would be horrified to know that they spent £1 billion over the period of this Parliament in subsidising one industry in a way that may not have brought many additional jobs.

Dawn Primarolo: I turn first to the general points about section 48 relief, as we are dealing with those issues. Section 48 was intended to pump prime the production of low-budget British films, leading to more success, to more recycled profits and, eventually, to structural change. It has produced about 50 films a year that otherwise would not have been made. I am sure that we are all great fans of the commercial successes, which include ''Billy Elliot'' and ''Bend It Like Beckham''.
 In its investigation, the Select Committee on Culture, Media and Sport found that the tax reliefs have been vital in securing inward investment to the United Kingdom and maintaining a critical mass of indigenous film making. I will return to the period from 1997 but, in 2003 alone, the reliefs secured a record year for productions in the United Kingdom, with £1.17 billion of production expenditure and secure British involvement in 177 films. Section 48 relief has ensured the production of a number of low-budget British films. That is to be applauded and is precisely the issue that the Government wanted to tackle. 
 Even the industry accepts that the other aim, which was for the creation of the critical mass to lead to structural changes in the industry, particularly on the distribution side, has not been achieved. Some of the discussion about the new tax credit focuses on that principle. The industry accepts that section 48 has run its course and it is working with the Department for Culture, Media and Sport and with the Treasury to consider the replacement tax credit and the issues that need to be addressed. Since 1997, the British film industry has benefited from record investment. The latest estimates from the industry are that more than £6 billion has been invested under sections 42 and 48 reliefs. That level of investment continues. If the hon. Member for Yeovil (Mr. Laws) examines the detailed 
 study that the Select Committee has carried out on the industry as a whole, he will see that the reliefs are crucial in helping that pump-priming and ensuring that such investment continues to come into the UK. 
 Clauses 114 to 118—I have left out clause 119 because the hon. Member for Hertford and Stortford wants to discuss that specifically—counter an abuse of the reliefs. I want to explain why that is important. I know of the hon. Member for Yeovil's long-held opposition to the film reliefs, but the Government are committed to the success of the film industry. We are of the view that we should continue to invest in the prize of huge inward investment in the British film industry, assistance to indigenous film making and the creation of that critical mass.

David Laws: I am somewhat disturbed that, as evidence of the value of the tax relief, the Paymaster General seems to be relying on a Select Committee rather than work by the Treasury, with the accompanying scepticism that one would expect of the Treasury when it approaches such issues. Given that the taxpayer has spent £1 billion on the relief, will she undertake to have the Treasury conduct a proper study of the costs and benefits of the relief and publish the results of that study?

Dawn Primarolo: It is not the habit of the Treasury to duplicate work undertaken by Select Committees, or to undermine or to question the excellent work that they undertake. If the hon. Gentleman has not read the Select Committee report, I commend it to him and its answers to the questions. I am sure that he is not suggesting that we should waste resources by conducting another investigation, only to reach the same conclusion. I have told him of the Government's conclusion. I know that he will disagree with that, but that is the view of the Government on investment in the British film industry.
 Regrettably—I said this when we discussed the matter before—those who seek to tax plan and to gain advantage from the tax system go across the whole of the tax system. It is not just a matter of whether that occurs in the film industry. The hon. Gentleman will know from previous discussions on Finance Bills that I have sent the clear message, as I continue to do, to those who use the tax system in ways that are not intended that the Government will deal with that, should it be necessary. 
 The current relief works by giving individuals an upfront tax repayment in respect of trading losses claimed against their general income. As income arises from the films in later years, the individuals pay tax on the profits. The overall result is a form of tax deferral that gives an incentive to invest. We do that at different points in the tax system. That arrangement has been the traditional, accepted way of assessing the film tax relief. 
 The avoidance schemes, as is often the case, involve complex arrangements that enable individuals who have benefited from upfront relief to dispose of the income stream on which they would have had to pay tax. Such arrangements allow them to get back the capital that they invested. That leaves them with an 
 outright tax gain, which is not the purpose of the provisions and is not acceptable. The clause raises a tax charge where there has been such a disposal on the amount they got back, so as to ensure that the deferred tax liability is paid, and that a fair balance is struck and maintained between industry, investor and Exchequer. 
 The film industry agrees that the schemes concerned are unacceptable, and many representative bodies have welcomed the action we are taking. This clause, along with clauses 115 to 118, will ensure that the deferred tax, which is in excess of £2 billion, is recovered over the next 15 years. 
 I have heard arguments, so it is as well to put them on the record, that some of the schemes-, mainly the film schemes, are acceptable because the partnership might earn taxable income in year two onwards. That is highly questionable and the operators admit as much because, as an intrinsic part of the scheme, they value the future income as next to nothing at the end of year one. In any event, future taxable income does nothing to reverse the unfairness of the way the scheme is funded. The fact that a wealthy individual can make a significant return if a project is successful makes it even more objectionable that they should have the entire upfront gain. 
 I shall explain what is supposed to happen from the Exchequer's perspective. The Exchequer has given up tax relief upfront, which is the equivalent of 40 per cent. of the film's budget. If the film generates no income at all, that remains the position. Under the official reliefs under sale and leaseback structures, the tax on the rental income, which is what is cut out of the equation, ensures that four fifths of the initial relief is clawed back over the terms of the lease. That is what is cut out to protect the upfront gain, and the rest does not arise. To counter that, where individuals leave the scheme, we have put in place a charge that ensures the gain comes into the tax charge. 
 The hon. member for Hertford and Stortford raised the question of what happens if a person who has invested unfortunately dies. The charge will not arise after a person has died, unless that person has exited with a tax advantage before their death. The exit charge only applies to individuals who have claimed loss relief. If an individual dies, any capital withdrawn or contribution received after their death will be made or received by someone else, either their personal representatives or their beneficiaries, and they cannot therefore be subject to the exit charge. 
 The hon. Gentleman raised the question of an individual transferring future rights to profit to another individual. It is perfectly normal for some people to move to a different country and become a non-resident of the UK, and any person who does will be taxed as a non-resident on UK-sourced income, subject of course to the extensive network tax treaties. That can affect anyone who still carries on any business in the UK, and there is no reason to make a special exemption for people with a business interest in the film industry, because that would clearly be unfair and against the spirit of the obligations under the treaties. In circumstances where future rights to 
 profit are transferred to another partner or moved abroad, that is the current position. 
 The hon. Member for Yeovil asked what the yield was. He did not find it in the Red Book because it is protection of revenue of £85 million, we estimate, over the next three years—protection measures cannot be scored in the same way as the generation of income. It is part of the scheme that we are running to stop gains moving outside the tax net. 
 The hon. Gentleman asked whether film relief was just an invitation to avoid tax. That is a crude summary—he put it rather more tactfully in saying that he was not convinced by the reliefs. As I said to him, the Government's view is that the reliefs provide an incentive for people to invest in the film industry and there is a huge gain from that in terms of production of British films and the growth of an indigenous film industry to create the critical mass. It was always envisaged that film makers would access the main tax reliefs through sale and leaseback or similar tax deferral schemes. 
 In practice, those schemes allow investors to spread payment of part of their normal tax liability over a period of their exploitation of a film—the income coming in—in return for making an investment in that film, which goes to the film maker. The benefit to the investor is akin to an interest-free loan; it is an incentive to invest in British industry. Individuals who seek to exit tax free are effectively not playing the game, of which the rules are clear. It is reneging on the balance that has been struck. I am trying to put it delicately, having been chastised earlier today by the hon. Member for Arundel and South Downs. 
 The rules are there to operate in a particular way. If people seek to frustrate them, the Government will attempt to return to the legislation so that it is used in the way it should be used. Some people seek to use the investment incentive to create gain. The Government are interested in ensuring that people who are committed to the film industry and are prepared to invest in it over time are provided for within the tax system in the same way as in other parts of the tax system. 
 The hon. Gentleman referred to the new relief. The Inland Revenue and Treasury are discussing the details with the industry. We hope to publish full details in the summer. In brief, we are trying to ensure that the film maker will be able to claim a deduction for production expenditure that can either be offset against taxable income or surrendered to the Treasury, so it will be a tax credit. We are still looking in detail at the way in which the relief will work and its distribution through the film industry to try to direct it specifically at the area that the current relief is directed to and to take the opportunity to recheck, as the hon. Gentleman suggests we should, that the relief works as we intended. We will do everything that we can to ensure that it does. 
 However, it is impossible in these circumstances to ensure that all the policy points are met. The structure of the industry and distribution in particular are still of concern to the industry, DCMS and ourselves. We still 
 have not come to a conclusion over whether tax is appropriate there. 
 The Government remain committed to investment in the British film industry and to providing these reliefs. However, as with any other relief in the tax system, if they are used in ways that were not intended and people are making tax-free gains that were not intended, we will make arrangements to prevent that from happening. Clauses 114 to 119 and other clauses that we will discuss later deal with precisely that. 
 The film industry has welcomed the move. It recognises that, to have a sustainable and long-term future, it has to have reliefs that operate in the way that was intended and that do not make the industry a target of planning schemes that bring no extra money into films but result in a loss to the Exchequer, which is unacceptable to everyone. 
 Question put and agreed to. 
 Clause 114 ordered to stand part of the Bill.

Clause 115 - ''Disposal of a right of the individual to

Question proposed, That the clause stand part of the Bill.

Mark Prisk: Clause 115 defines how the previous clause operates in respect of disposals of the right of an individual to profits arising from the trade. Clause 114 considers the broader aspects of the provision, but I would like to focus on the specifics of disposal, particularly defaults. A default in the payment of income is included as a disposal, which is considered to be one of the three triggers for a tax charge. A default in the payment of income could occur for several reasons. For example, the payer could become insolvent, or a default may result after a genuine commercial dispute. It seems unreasonable that a tax charge might be triggered in such circumstances.
 If a payer becomes insolvent, there are several instances in which their obligations are guaranteed or underwritten, as I mentioned earlier. In such circumstances, it would be helpful to know whether a disposal would be deemed to have occurred. I hope that the Paymaster General will at least be able to clarify the intent underlying the clause.

Dawn Primarolo: Perhaps I could deal with the issues around default. To face an exit charge, a person must not only have lost their right to income but have obtained a tax advantage by receiving a non-taxable benefit. If there is a genuine commercial failure, a creditor will not receive non-taxable benefits that make them better off than they would have been without the failure. If we do not have that condition in place, it would be easy to avoid the exit charge. There are two points to consider: whether the payer artificially disposes of their assets and defaults on payments, and whether the film investor's loan liabilities are written off.
 We are seeking to achieve a delicate balance, as was touched on by the hon. Gentleman and some of the 
 representations. The trigger is the two things together—the untaxable gain and the exit—but if there has been a genuine commercial failure, the other rules already operate, and we expect that to remain the case. However, we must be mindful that some may seek to create a failure in order to get out of the exit charge. We must prevent that. It is not without precedent in the tax system that insolvency has been a way of trying to escape tax charges. 
 Question put and agreed to. 
 Clause 115 ordered to stand part of the Bill. 
 Clauses 116 to 118 ordered to stand part of the Bill.

Clause 119 - Restriction of relief: non-active partners

Mark Prisk: I beg to move amendment No. 183, in
clause 119, page 99, line 30, leave out 
 'or a member of a limited liability partnership'.

John McWilliam: With this it will be convenient to discuss amendment No. 182, in
clause 119, page 100, line 11, leave out subsections (7) and (8) and insert— 
 '(7) In subsection (1) ''a trade'' does not include— 
 (a) underwriting business within the meaning of section 184 of the Finance Act 1993 (Lloyd's underwriters), or 
 (b) a trade where the Board have, on the application of a partnership of which an individual is a general partner or member of a limited liability partnership, notified the partnership that the Board is satisfied that the trade will be effected for bona fide commercial reasons and will not form part of any scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax. 
 (8) Any application under subsection (7)(b) above shall be in writing and shall contain particulars of the operations that are to be effected and the Board may, within 30 days of the receipt of the application or of any further particulars previously required under this subsection, by notice require the applicant to furnish further particulars for the purpose of enabling the Board to make their decision; and if any such notice is not complied with within 30 days or such longer period as the Board may allow, the Board need not proceed further on the application. 
 (9) The Board shall notify their decision to the applicant within 30 days of receiving the application or, if they give a notice under subsection (8) above, within 30 days of the notice being complied with. 
 (10) If the Board notify the applicant that they are not satisfied as mentioned in subsection (7)(b) above or do not notify their decision to the applicant within the time required by subsection (9) above, the applicant may within 30 days of the notification or of that time require the Board to transmit the application, together with any notice given and further particulars furnished under subsection (8) above, to the Special Commissioners; and in that event any notification by the Special Commissioners shall have effect for the purposes of subsection (7)(b) above as if it were a notification by the Board. 
 (11) If any particulars, furnished under this section do not fully and accurately disclose all facts and considerations material for the decision of the Board or the Special Commissioners, any resulting notification that the Board or Commissioners are satisfied as mentioned in subsection (7)(b) above shall be void. 
 (12) This section has effect subject to sections 118ZJ and 118ZK (transitional provision). 
 118ZEA Application to particular trades 
 (1) Section 118ZE(7)(b) shall not apply to any trade unless— 
 (a) It can be shown that in respect of any period where a loss was sustained, the trade was carried on throughout that period on a commercial basis and in such a way that profits in the trade could reasonably be expected to be realised in that period or within a reasonable time thereafter; 
 (b) The profits of the trade are taxed on the general partners or members of a limited liability partnership who claimed the reliefs referred to in subsection 118ZE(1) in the same proportions that the partnership's loss was claimed. 
 (c) The partnership's expenditure is not applied, directly or indirectly, to provide security for repayment of any borrowings of the partnership or of any of its general partners or members of a limited liability partnership, including without limitation, by means of a cash deposit; 
 (d) The receipts from the trade are entirely contingent on the performance of the products or services comprising the trade; and 
 (e) The trade is carried on for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability of tax. 
 (2) The Board may make regulations with respect to the application of section 118ZEA(1) above to particular trades.'.

Mark Prisk: Amendment No. 183 seeks to amend new section 118ZE of the Taxes Act 1988 in clause 119, so that it does not apply to members of limited liability partnerships. New section 118ZE introduces a new provision restricting interest relief on borrowings to fund a partnership and sideways loss relief for general partners and members of limited liability partnerships who carry on trade where the partners may devote only a small amount of their time to that trade.
 There is provision for repeal in section 118ZB, which restricts that relief, but it is provided without any time requirement. New section 118ZE(3) creates a potential duplication, namely what I would describe as a parallel restriction for people in different circumstances. The purpose of amendment No. 183 is to probe the Government's reasoning, not least because new section 118ZE seems to lack any provision for repeal. I hope that the Paymaster General will address that particular point. 
 Amendment No. 182 makes a more substantial point. Clause 119 aims to restrict tax relief for non-active partners in limited liability partnerships. The purpose of the amendment is to allow commercial trade to continue subject to prior Inland Revenue approval. The Committee will recall the Paymaster General's decision on 10 February suddenly to change the rules on tax relief for partnership losses. There was quite a furore at the time. I think it is accurate to say that the action was precipitate and that it may well affect current projects. However, the most significant effect is the message that it sends. 
 The Paymaster General will say that her actions signal that the Government are no longer prepared to tolerate persistent and abusive tax avoidance. There is a strong element of truth in that and I fully understand it. However, there is an important balancing question to answer. Those investing from abroad, especially many of the major legitimate players, have been very concerned. They seek certainty and not sudden change. In previous debates on the clauses, she has rightly referred to the evidence and considerations of the matter by the Select Committee on Culture, Media 
 and Sport. What shines out from its report is that certainty is crucial in the tax regime treatment of the film industry, so there is a risk that 10 February has undermined that long-term confidence. 
 Amendment No. 182 seeks to provide certainty and to distinguish tax-avoidance-led trading and legitimate commercial trades. In addition, new section 118ZE already contains a carve-out for underwriting businesses. Therefore, it would seem legislatively logical for the amendment to provide a further carve-out by extending the scope of new section 118ZE(7). 
 The amendment would exempt commercial trades and make them subject to pre-approval by the Revenue based on a well established tax law test, namely, that the trade must be effected for bona fide commercial reasons. The benefit would be twofold: first, there would be considerable improvement in the certainty for the prospective investing partner; secondly, it would create an opportunity for the Government and the Revenue to protect tax revenues. 
 The amendment seeks to distinguish between commercial trades and tax-avoidance structures using several simple measures, including striving for profit, or the fact that tax on profit should be treated in the same way as tax on losses, or that profit should depend on performance. 
 The amendment seeks to enable the Revenue to make sector-specific regulations if it deems it necessary. That might allow the Government, if they feel that it is required, to change the definition of a British film in due course. There has been a recent change in that field and the amendment would allow the Government that flexibility. 
 I know that it is not the aim of the Paymaster General to hit genuine enterprises and investors. Indeed, that was made quite clear in the statement on 10 February. The Inland Revenue notice that was sent out to the press states: 
''The new rules will apply to trades carried on in partnership, and will only affect partners who did not spend a significant amount of time working in the trade when the losses arose. The changes will not therefore affect genuine traders who actively run their own trade.''
 Unfortunately, clause 119 may well restrain commercial trades. That is the view of several tax experts and a number of leading players in the field, such as Grosvenor Park and Ingenious Media plc, which has invested something like £120 million in the sector. The Paymaster General earlier referred to a number of films. One example is ''Girl with a Pearl Earring'', a film that has been much acclaimed—at least by the female population, given the presence of Mr. Colin Firth. That aside, it is nevertheless an important long-term investment. 
Mr. Stephen Pound (Ealing, North) (Lab) rose—

Mark Prisk: I give way to the hon. Member for Ealing Comedy.

Stephen Pound: This has absolutely nothing to do with the subject under discussion, but in the interests of parity and equality we should mention Scarlett Johansson.

Mark Prisk: I am grateful to the hon. Gentleman, and I have no doubt that he will be making his usual erudite and unique contribution to the Committee's proceedings in due course.
 I have mentioned a number of organisations. One example is, as I said, Ingenious Media, which operates a structure called Inside Track, which invests 33 per cent. of the film's budget and draws about 50 per cent. of the film's receipt by way of cash. It operates on a portfolio basis, or, as the industry describes it, a slate basis. That reflects the commercial reality, which the Paymaster General herself highlighted, that most UK domestic films do not make a profit, and that there therefore needs to be the ability to look at the portfolio as a whole. That form of investment is vital to the industry. 
 I am sorry that the hon. Member for Yeovil is not able to debate whether tax relief for the film industry is a good thing, but no doubt the Liberal Democrats will sort out their policy and decide whether they are in favour or not.

Stephen Pound: Possibly both.

Mark Prisk: Indeed, I suspect that they may be both simultaneously.
 The crucial point is that, helpful as tax relief is, without the actual upfront investment, many films 
 would not even begin production. I am aware that the Paymaster General has received a number of representations from hon. Members from both sides of the House, be it from the chair of the all-party group on the film industry or senior members of the Culture, Media and Sport Committee. There is genuine concern across the House that the clause may be defective. 
 In short, ensuring that anti-tax avoidance measures do not ensnare legitimate operations is not only crucial to those affected but pretty important to the industry as a whole. That is at the heart of our concern. The aim of the amendment is clearly to distinguish between tax avoidance and genuine commercial trades. The amendment could well achieve that, while enabling the Revenue to take the reasonable steps it needs, in due course, to protect tax revenue. The approach is balanced and I hope that it will merit serious consideration by the Paymaster General. I fully accept that it is not a perfect amendment, but its purpose is certainly clear. On that basis, I look forward to listening to her response. 
 It being twenty-five minutes past Eleven o'clock, The Chairman adjourned the Committee without Question put, pursuant to the Standing Order. 
 Adjourned till this day at half-past Two o'clock.